New name, U.S. move no cure for problems at Encana: analysts
Firms with successful strategy ‘typically don’t go through a rebranding effort’
CALGARY Encana Corp.’s name change and relocation isn’t likely to radically improve its performance on its own, even if it does attract more passive U.S. investment funds, financial analysts and fund managers say.
Encana president and CEO Doug Suttles said on Thursday that plans to move the venerable company’s headquarters from Calgary to the U.S. were motivated in part by its underperformance to its U.s.based peers.
“We intend to establish a U.S. domiciled company that will expose us to significantly larger and growing pools of investment,” Suttles said. “By looking at prior data, this will expose our company to almost three times the amount of index participation we see today as a Canadian company.”
But shares of Encana, which, subject to shareholder approval, will be renamed Ovintiv Inc. when it moves its headquarters to a U.S. location, have also underperformed Canadian peers, compelling many analysts to warn that the company’s relocation will not necessarily improve its performance.
“This is not the fix you are looking for,” Raymond James analyst Chris Cox wrote in a research note Friday, adding, “companies that are successfully executing strategically and conveying a compelling message to the Street typically don’t go through a rebranding effort.”
Encana shares fell early in the day Friday but bounced back to close up 5.4 per cent at $5.44 in Toronto.
“We believe the reaction reflects an investor base that is fatigued and frustrated that this (relocation) is garnering the attention of management, as opposed to more impactful solutions to reverse the disappointing share price performance since the company announced the merger with Newfield,” Cox wrote.
CIBC World Markets analyst Jon Morrison said in a note that he is “perplexed as to the path the Encana is taking” because he doesn’t believe “the fact that Encana has been a Canadian-headquartered entity has led to any material share price underperformance.”
Steve Campbell, Encana’s senior vice-president of investor relations and communications, said the move will allow Encana to be listed on the S&P 400 index, prompting a large number of passive funds to buy stakes in the company.
“Our No. 1 job is to make a good return for the owner,” Campbell said in an interview, reiterating that Encana was looking to address the underperformance relative to U.S. players.
The company’s recent underperformance dates back to its announcement of a Us$7.7-billion deal with Newfield Exploration in November 2018, which brought the company into a challenging play in Oklahoma.
Encana stock is down 33.38 per cent year-to-date, compared to S&P/TSX Capped Energy Index’s nearly 11-per-cent drop during the period.
Indeed, many analysts and fund managers were highly critical of the Newfield deal as it signalled a change in focus for the company away from what used to be called its “core four” resource plays in Alberta and Texas.
“They didn’t appreciate the level of hatred for that play,” Eric Nuttall, senior portfolio manager and partner at Toronto-based Ninepoint Partners, said of the Newfield deal, calling it “their worst move.”